Earnings Transcript for 8001.T - Q4 Fiscal Year 2022

Keita Ishii: Good morning, everyone. I’m Ishii COO of Itochu Corporation. Thank you very much for joining us today. Now, we would like to explain FYE 2022 business results summary and FYE 2023 management plan. Please refer to the PowerPoint presentation on the screen. First, Page two, this is the summary of financial results for FYE '22. Consolidated net profit significantly exceeded the previous record high and reached ¥820.3 billion about the double of that of last year historically good results. After excluding the extraordinary gains and losses core profit was also up 1.5x from the previous year and reached about ¥690 billion greatly renewing the record high number. We exceeded initial forecast in all segments recording higher core profits. In five segments, including Machinery, Metals, Minerals, Energy and Chemicals, General Products and Realty and ICT and Financial Business, highest profits were recorded. As resource prices soared to unprecedented level and supply chain disrupted due to the COVID-19, we benefited from expanding trade margins in wide ranging areas. However, we believe that our results demonstrate that we are steadily strengthening our earnings base in all segments without relying on specific earnings. Please turn to Page nine. We have steadily enhanced cash flow and various financial structures and achieved the highest and best results. In the first year of the brand-new deal of '23. our results substantially exceeded the targets, a major quantitative achievement. Please turn to Page 10. This is a review of qualitative targets as for the market-oriented measures at FamilyMart and NIPPON ACCESS, we introduced automated ordering system utilizing DX or digital transformation and also optimized the delivery routes. At FamilyMart new initiatives such as media business using the large scale signages and unmanned payment stores were introduced. Also, we newly invested in Under Armour, Hitachi Construction Machinery and Nishimatsu Construction and others which could become the core for further growth, we would enhance the collaboration with them to seek synergies to broaden our revenue base. In enhancing contribution to an engagement with SDGs, we exited from two core businesses and significantly reduced the GHG emissions. And also, we are working on the commercialization of a more environmentally friendly plastics and recycled fiber to reduce GHG emission. In April last year, we established Itochu SDG studio to dispatch information about the SDG initiatives. In addition to our own efforts by supporting the SDG related initiatives in the society, we'd like to contribute to the sustainable society. Next is Page 11 and 12. This shows the overview of FYE '23 plan. Consolidated net profit target is ¥700 billion. This is lower than the year before partly due to the absence of one-time gains on exits based on the asset replacement. But as you see on Page 12, solid growth of core profit is expected mainly in non-resource areas which are less susceptible to market conditions. As you see on Page 11, in addition to 30 billion buffers, the Russia and Ukraine-related and COVID-19 related impacts are factored into some extent. And as you see on Page 14, exchange rate and resource price assumptions, we said at the conservative levels therefore, we believe we are well on track to achieve the targets. Please turn to Page 13. Concerning shareholders return for this fiscal year, we would increase the dividend by ¥20 per share from ¥110 in FYE 22, increasing the minimum dividend by ¥10 from ¥120 which had been announced before to ¥130 per share. We will continue the progressive dividend policy in FYE 24 and set the minimum at ¥130 plus offer and achieve 30% payout ratio in FYE 24. And we would actively and continuously execute share buybacks as appropriate in consideration of the cash allocation situation. We will continue to promote the shareholder return, which would exceed the expectation of the market. We expect the current fiscal year to be another year with many variable factors. In retail sector where we are strong consumption is expected to resume as COVID-19 spread a bit and we expect the recovery of the demand of inbound tourists as yen depreciates. Also, we anticipate continued brisk digital investments by companies in response to a new society and expect further growth from utilization of renewable energy, PPA and power storage. As for the collaboration with the Hitachi Construction Machinery and Nishimatsu Construction, we would expand our business areas and also there will be a development of the DX businesses working with ICT and financial business company. And also there will be a proposal of the distributed EMS including mobility. We will create a new and diverse profits unique to Itochu. As we grasp other businesses and projects, we can be the core of each company, we will try to foster them. For future economic activities, especially shift to new supply chain in consideration for the economic alliances and national security. The current geopolitical disruptions could bring opportunities for us to enter into new businesses. We will continue to utilize our strength and develop earnings unique to Itochu, we hope to have your continued high evaluation for us. That's all I like to hand the microphone to our CFO Mr. Hachimura.

Tsuyoshi Hachimura: Thank you. This is Hachimura speaking. I would like to give you the details of FYE 22 business results and FYE 2023 management plan. Now, starting with the financial results, turning to Page two, consolidated net profit was ¥820.3 billion. This is more than 2x the results of the previous year. In all eight segments profits increased in machinery, metals and minerals, energy and chemicals, general products and realty and ICT financial business. In five segments a record high numbers were achieved. ¥130 billion, the extraordinary gains and losses were booked excluding that the core profit was ¥690 billion, which was also record high. In FYE 20, we booked ¥485.5 billion, ratio of the group companies reporting profit exceeded 90% at 90.9%. So 1/4 of the 274 companies had the highest profit. And less than 60% of them have less than ¥2 billion of profit. So those well diversified the small medium sized the businesses have supported the management of the company despite the resource price bubble. Going to Page three. Profits increase in all segments, but in terms of the size of contribution, the number one was metals and minerals, general products and Realty, ICT and financial business, energy and chemicals, machinery, food, The 8th and textile. I'm not going to go into the details of the comments. But in terms of the equity pickup, as I said the medium sized businesses supported overall management in terms of the size of the contribution. The highest was Minerals and Energy Australia, which was up by ¥68.1 billion year-on-year, recording ¥158.7 billion. Second was CITIC ¥96.4 billion and next was FamilyMart ¥44.7 billion; Marubeni-Itochu Steel for the first time, the record high number was achieved at ¥31.3 billion, North American consortium material ¥22.6 billion and ¥CDC 20.7 billion and Itochu fiber limited, this is a pulp business in Europe, ¥17.8 billion and NIPPON ACCESS ¥17.1 billion. Mobile phone related top 10 companies account for about 50% of the order contribution. Now lower than ¥10 billion. The major improvements were observed at the NSF, ¥5.1 billion improvement to ¥9.7 billion. The business in Azerbaijan improved by ¥7.1 billion to ¥8.9 billion though recovered from the deficit last year and achieved ¥8.4 billion, IEI environment, the environment business in Europe improved ¥6.9 billion to ¥7.5 billion. The bottom left shows the distribution between the no resource and resource. No resource was ¥610.3 billion and resource was ¥221.6 billion, so record high numbers for both of them. The highest record of the resource business a profit was achieved, but the non-resource profit of¥ 610.3 billion is the record high and also the percentage of the non-resource was same as last year at 73%. On Page four, shows the extraordinary gains and losses, ¥130 billion, which was the record high. In Q4, net 1 billion extraordinary gains were booked. The major ones include Japan, Brazil, paper pulp, Paidy, Taiwan FamilyMart, Itochu Corp Americas, those have been booked already up to Q3. Page five, you see the asterisks representing record highs, core operating cash flows have ¥190 billion, there was a very strong operating revenue and this ¥800 billion level was lower than FYE 21, ¥900 billion level. But with the active operating activities, the working capital increased. So as a result, this looks lower than before. But in real terms, this was the record high number. In the next page, shareholders equity, for the first time exceeded the ¥4 trillion reached ¥4.2 trillion. In terms of the net interest-bearing debt was ¥2.83 trillion. In terms of growth, it was ¥290 billion, 1/3rd of our debt is denominated in foreign currency. So, recently, due to the higher interest rate affecting the dollar level, and in consideration for the future funding, we have appropriately controlled the debt level. As for the ratio of the shareholders equity to total assets, it was 34.6% and net DRE 0.54x. So we have been promoting the improvement of the financial structure. ROE was better than what we promised, with a high return it was higher than 21% at 21.8%. So what we are aiming for is as you can see in the FYE 24 targets, the net DEO of 0.7 to 0.8 and ROE of 13% to 16% which are much better than the competitors. So in consideration for those numbers, our numbers were very strong. Now, on Page 25, we talk about the investments. The total major investments are ¥297 billion, in FY 2017, we had the 215 billion and so this was another low level. In FYE 16, we had a major investments and also in FYE 21. And we have been promoting the asset replacement. And we plan to exit the Japan, Brazil paper and pulp and Taiwan FamilyMart in FYE 21. But it was delayed to FYE 22. That was a cash in. And the Hitachi Construction Machinery and [indiscernible], the cash out is now delivered to the following year. So as a result, the cash in was ¥47 billion, as you see at the bottom. And also, there are a lot of our interest to our exposure to Russia. We have one additional page of information in Sakhalin, we have the business there and we have reviewed the fair value. And in comparison, to the end of March, there was a decrease of ¥14.8 billion. This is based on other comprehensive income or OCI. The major business in Russia is Sakhalin-1, in Japan South, Sakha oil business. And also Suzuki Motors, Russia. This is a Suzuki business in Russia and also in Ukraine. We have [Matador] [ph] Suzuki the current input in sales business. So those are the exposure that we have. In Q4, the Russian invasion into Ukraine started and we have been reviewing the fair value evaluation and we have been accelerating collection of receivables. And as for the investment into Sakhalin, we regularly review our fair value evaluation. So the question of Russian Sovereign Credit Rating, we are have changed this to speculative. So by changing that rating, we have increased the country risk premium. As a result, net present value was lowered. This was the major reason. As for the factors, we look at the ad, foreign exchange, oil prices and dividend and so forth, and the biggest impact that came from the lower credit rating. So about a ¥30 billion loss before tax in OCI was booked in Q4. And the decrease of earnings in subsidiaries and associates and potential extraordinary losses have been factored into the FYE 23 plan based on the conservative assumptions. As for Ukraine is ¥2.6 billion unchanged. Now, let me talk about our plan for FYE 23. Page 11. So consolidated net profit of ¥700 billion include the buffer of ¥30 billion and also ¥20 billion extraordinary gains. This is 15% lower year-on-year. But if you turn to the next page, based on the core profit, we have a breakdown here. Last year, there was extraordinary gains and losses of ¥130 billion, which was a record high. So as a result, the core profit was ¥690 billion. So a ¥20 billion higher or 3% higher ¥710 billion is our conservative plan for FYE 23. So, here, we have a separation into the non-resource and resource. It is said that high resource prices are going to stay at the high level. But this resource business is not going to be the driver but rather the non-resource businesses will drive our core profit, especially in the non-resource, the food, 8th and construction and the financial business area, those defensive sectors we expect a strong growth from those businesses. Going to Page 35. Now, our management plan, we are in the second year of the brand-new deal 23. So we have been trying to increase the profit level by ¥100 billion and this brand-new deal 23, we had the tailwind due to the unexpected high resource prices. Our after-tax profit increased as a result. But our aim is to try to maintain the profit at or above ¥600 billion in a stable manner. And last year we achieved ¥690 billion, and we are targeting is about a ¥10 billion. So toward FYE 24, we'd like to make sure that we can maintain about 600 billion and at the same time improve the shareholder return. Now, going back again to Page 11, if you look at each segment and this is based on the after-tax profit. So, the changes are shown by segment. And if I may comment briefly, in textile, this is positive that this is because of the recovery major businesses. In sports area, there is a collaboration with Reebok, Under Armour and Desantis doing well. So sports related businesses are expanding and also, ecommerce is being utilized to expand our profit. So steadily, we would see an expected recovery. As for machinery. So it's minus ¥8 billion, including impact from Russia, we have a conservative outlook here. But from this fiscal year, our business with Hitachi Construction Machinery will start and as for others, we believe that we will be able to maintain those businesses at a good level. So flat core profit to level is expected for machinery. While metals and minerals, we have a conservative assumption for the resource prices. So we expected minus number here. Last year, the ¥60 billion profit was achieved at the Marubeni Ito 2 steel at that level off. And energy and chemicals, here it says minus 4.6 billion. This is almost flat, the oil prices are increasing and our transaction volume of the oil is lowering and there is an impact from Russia. And also other overheated trading in chemicals is being normalized. So, almost flat is expected for energy and chemicals. As for food, steady increase is expected. So FYE 22 in relation to the pork market, and Prima Meatpacker, Highlife, CPP were impacted -- negative impact but the prices recovered. And so, the basic businesses are expected to grow. So the food, core profit is likely to grow. As for general products and realty. There are many small segments, so there is a mixture. But the major one is, first of all pulp market. We have a conservative view there. And last year, there was extraordinary gains on sales. So excluding that North American construction material business was very strong. And the profit level will normalize for that. But at the same time, the tire business in Europe continues to be strong. So that's positive and construction is also recovering. So it's a mixture of the positives and negatives. So it's almost flat in terms of core profit. ICT and financial business, there was a contribution of the profit from Paidy last year. So excluding that our core profit in this segment is increasing steadily. Comments for each segments are included here from pages 16 to 24. But the major operating companies plan to have a higher profits. So we have a high expectation. The 8th there was a extraordinary gains and losses in relation to FamilyMart. So the core profit of the 8th or rather the core profit of the FamilyMart will increase by making the stores and products more attractive. Other adjustments and eliminations include CITIC and CPP, both of them, the profits are expected to grow as they are not the major ones but higher profits. So that's the explanation on each segment. Going to Page 14, our assumptions. First, exchange rate, the average is ¥120 to the dollar. And as for the interest rate, LIBOR 2.5%. High level and other crude oil brent $90 per barrel. And at the iron ore, we have a more conservative view from the latest numbers. So, we have a conservative assumptions overall. Of course, as you know, for this fiscal year, the risks including the interest rate and foreign exchange rate and slowing down economies and geopolitical situations, in each segment, we need to factor in various risks. And we have based our forecasts on the conservative assumptions. And as I said, that includes the buffer of ¥30 billion. The oil price is higher and as a result, the electricity prices are up and raw material prices are also up. So whether we can reflect them to the higher sales prices, each operating company factor them in. And this is the plan based on all of those operating companies forecast. Now going to shareholders return. What I like to say here is that in brand new deal 2023, we will continue the progressive dividend policy. So making sure that we have an incremental dividend increase. And based on after tax profit, we are looking into the dividend. So based on the net profit of ¥700 billion, we will of course, increase the dividend payment as promised. So minimum payment. We announced originally to ¥120, but now it's changed to ¥130 per share. And as for our last year, we're committed to ¥110 per share. And in addition, there was a share buyback of ¥60 billion. And in terms of the payout ratio last year it was 27.1%. And our target is to reach 30% of in FYE 24. And we like to look at the financial structure and improved our shareholder return and make sure to increase the dividend every year. So for this fiscal year, in terms of the payout ratio, it is 27.3%. So that will be the minimum level and we will also execute the share buybacks in an active manner. And if you look at the results so far, since FYE 2017, we have started to buy back our shares. So looking at the cash level situation and also the timing of the dividend payment, we like to make the overall decisions. As I mentioned, under the investment, there have been some investment items, foods or cash out timing was delayed or carried over. And as this is the beginning of the fiscal year, there are some major investment projects planned. So let's look at the cash position at the end of each term. And if you look at the minimum payout ratio, now this year’s payout ratio of 27.3% is the minimum level. So I think that before FYE 24, 30%. And if we combine that with the share buyback, we can expect that to be at the lowest minimum level. And that concludes my presentation. Thank you for your attention.

Operator: Q - Unidentified Analyst